BlackRock support for PepsiCo may stymie Peltz call for Mondelez merger

July 18, 2013|Reuters

By Martinne Geller and Atossa Araxia Abrahamian

NEW YORK, July 18 (Reuters) - BlackRock Inc said onThursday it opposes Nelson Peltz's proposal that PepsiCo Inc buy Mondelez International and shed itsbeverage business, signaling that the activist investor'sproposal could fall flat with fellow investors.

"At the moment, I would disagree with him," Larry Fink,chief executive of BlackRock, the world's largest money manager,said in an interview on CNBC. "I question how it would addlong-term value."

Peltz, a PepsiCo shareholder, said on Wednesday he wantsPepsiCo to buy the maker of Oreo cookies and Cadbury chocolatefor at least $62 billion and spin off PepsiCo's beveragebusiness - either globally or just in the Americas or NorthAmerica.

PepsiCo has said repeatedly that it sees no need for largedeals or splitting off its global drinks business, whichincludes its name-sake soft drink, Tropicana juice and Gatorade.

Fink said BlackRock currently owns 5 percent of PepsiCo.

Peltz's Trian Fund Management has a stake of about $1.3billion, or less than 1 percent, in PepsiCo, which boasts amarket capitalization of more than $131 billion.

With such a small stake, Peltz would have to persuade largeinstitutional shareholders to help him bring PepsiCo to thenegotiating table, said Henry Smith, chief investment officer atHaverford Quality Investing, which owns just under 1 millionPepsiCo shares.

"I don't think I'd bet against him," Smith said.

Trian declined to comment.

Peltz, who was involved in the breakups of Cadbury Schweppesand Kraft Foods, said his cause may be helped by the fact that37 of the top 40 PepsiCo shareholders also own Mondelez.

It may be easier to woo Mondelez shareholders, said SandyVillere III, a portfolio manager at Villere & Co, which ownsMondelez shares.

"You can have your cake and eat it too," he said, referringto the growth prospects of Mondelez on its own and any futureupside from a deal.

PepsiCo may be forced to move toward one of Peltz's optionsif he can generate institutional support, said Smith.

"But that's not going to happen in the next few months.That's a multiple-quarter time frame," Smith said.

PepsiCo shares closed up 1.8 percent at $86.80 on Thursdayon the New York Stock Exchange. They have gained 21 percentduring the past year, as the company has made progressstreamlining its business and improving its performance.

Mondelez shares closed up 0.3 percent at $30.58, still wellbelow the $35 to $38 per share price Peltz indicated for anacquisition - a sign that Barclays analyst Andrew Lazar took tomean investors remain skeptical that a deal will be consummated.

"Not that many people on the buy side really believe thatthere's a ton here. Many on the sell side would love to beinvolved in such a transaction, but not that many believe it'sgoing to happen," said James Tierney, chief investment officerat WP Stewart, which used to own PepsiCo shares.

Adding PepsiCo's Frito-Lay snacks to the large internationalnetwork Mondelez uses to sell Cadbury chocolates and Oreocookies is part of the rationale for the deal, along with costsavings and the greater focus that would come from being just asnack company, following separation of the drinks business.

But J.P. Morgan analyst John Faucher said the market may nothave enough faith in PepsiCo management to pull off such a bigdeal at this point.

Last year was a transition year during which PepsiCo cutthousands of jobs, pruned its portfolio and increased itsmarketing to reignite growth amid investor frustration at astagnant stock price and a North American drink business thatwas losing ground to Coca-Cola Co. PepsiCo's business hasimproved, but analysts say the company still has more to do.

"With neither company operating at full speed at this point,we think adding in massive integration would only exacerbatetheir problems," Faucher said, adding that he is skeptical ofany deal that involves combining store delivery networks, sincedisruptions can hurt sales.

Of the strategic options laid out in Peltz's analysis, theone that seems the most likely to occur is the spin-off of theNorth American beverage business, because the company is alreadyconsidering options for it.

PepsiCo has said repeatedly that it would update the marketon that business in early 2014. Coca-Cola has already begun torefranchise some of its U.S. bottler system and analysts havelong said they expect similar moves from PepsiCo.